Search Now

Recommendations

Thursday, April 12, 2007

Fortis Healthcare IPO


Fiercely costly


Fortis Healthcare (FHL), promoted by the Ranbaxy Laboratories group, opened its first hospital in Mohali in 2001.Since then, FHL has expanded its operations by opening multi-specialty hospitals (including some with super-specialty `centers of excellence’), a boutique-style hospital and various satellite and heart command centers.

The multi-specialty `spoke’ hospitals in the network provide comprehensive general healthcare to patients in their local communities, and super-specialty "hub" hospitals provide more advanced care to patients, including patients from `spoke’ hospitals and other hospitals in the surrounding area. Six of FHL’s hospitals are owned or majority-owned by the company, which also operates Escorts Heart Centre at Raipur (EHCR) in collaboration with the government of Chhattisgarh. The remaining four with the satellite and heart command centers are operated and managed by FHL but owned by trusts or societies or other corporate owners, except for Fortis La Femme, in which the company currently own a 5% interest. In February 2007, the company acquired 100% interest in Hiranandani Healthcare (HHPL) from its then existing shareholders in Navi Mumbai.

FHL has approximately 1,490 inpatient beds in use across the network of 11 hospitals, with capacity to increase inpatient beds to approximately 1,790. In the nine months ended December 2006, the hospitals performed over 4,500 heart surgeries, 4,000 angioplasties and 12,500 angiographies. During Fiscal 2006, it performed over 5,000 heart surgeries, 5,000 angioplasties and 15,000 angiographies.

FHL has raised around Rs 153.69 crore through the pre-IPO placements and further plans to raise around Rs 423 crore-Rs 505 crore, depending on the price band. About Rs 100 crore are to be raised through debt. Nearly Rs 200 crore are to be spent on construction and development of the planned hospital to be located at Shalimar Bagh in New Delhi by Oscar Biotech (the company’s subsidiary). There are plans to refinance Rs 560 crore raised to acquire Escorts Heart Institute Research Centre (EHIRC) in New Delhi and to prepay a short-term loan of Rs 70 crore.

Strengths

  • FHL has a good brand image in North India and can capitalise on it to attract patients as well as skilled and reputed doctors while expanding in the rest of the country.
  • Increasing incidence of lifestyle diseases, medical insurance penetration, medical travel from other countries are growth drivers for the healthcare sector.

Weakness

  • FHL is in the midst of significant litigations related to its acquisition of EHIRC and its subsidiaries comprising among other things EHIRC’s corporate existence, tax payments, and land rights.
  • In the nine months ended December 2006, the average occupancy rate at its main hospitals---Fortis Hospital at Mohali, EHIRC in New Delhi, Fortis Hospital at Noida and EHRC at Rajpur in Chhattisgarh were 75%, 81%, 82% and 91%, respectively, which are reasonably high (there are limits beyond which occupancy rate cannot be increased). Yet, the company is making operating losses. All of them are well established and have run through their gestation periods.
  • The company has not accounted for Delhi High Court’s direction for free treatment to indigent patients. It has preferred to appeal to the Supreme Court. In the nine months ended December 2006, there would have been an additional expense of Rs 6 crore, which has not been provided. If the high court’s direction is upheld, the company may have to provide for substantial sums from retrospective effect.
  • Higher real-estate prices/lease rentals and interest rates will add to its fixed costs. The company has aggressive expansion/acquisition plans (though the IPO is mainly to refinance the existing debt), which can make it debt heavy, require constant infusion of fresh capital and make the turnaround difficult and lengthy.

Valuations

FHL has done pre-IPO placements with various investors at an average price of Rs 145 per share. However, that’s the only comforting factor about valuation.

FHL acquired 90% in EHIRC in September 2005 for Rs 585 crore (valuing EHIRC at Rs 650 crore). EHIRC presently contributes around 60% of the consolidated revenue. Thus, the total value of the company would be around Rs 1100 crore. But at the offer price band of Rs 92- Rs 110, it is valued at around Rs 2100-2500 crore. On the other hand, Apollo Hospitals Enterprises, which is about 1.7 times larger than FHL, is currently available at a market cap of around Rs 2500 crore! Moreover debt on the books of FHL will be much higher than that on the books of Apollo Hospitals. Thus enterprise value of FHL will be much higher than that of Apollo Hospitals.

The organic growth in this sector cannot be high and the high capital-intensive nature ensures low ROCEs/RONWs. Besides, the sector is subject to government regulations. Hence, corporate hospitals should not get high P/Es (valuations). However, Apollo Hospitals, which is the only listed major hospital chain, commands a high TTM P/E of 35. This is partly due to scarcity premium arising from funds seeking exposure to the Indian healthcare sector. Apollo Hospitals is the only available stock.

One other reason is Apollo Hospitals’ aggressive expansion in pharmacy business, which is a high return-high growth sector, commanding the high valuations of retail business. However, Ranbaxy group’s pharmacy business is steered through promoter group company Fortis HealthWorld. Many pharmacies in FHL’s hospitals are run by Fortis HealthWorld.

Moreover, while Apollo Hospitals has a long track record of profitable growth, FHL has mounting losses to report.

Thus, by all accounts, FHL should get much lower valuation than Apollo Hospitals, whose valuation itself looks high.